Commercial Loan Options - What would you do?

Question

Long time reader, second-time poster (I think)

I’m under contract on a small multifamily (6 units) and am comparing loan options. For background, this is a stable, performing property with a plan to buy and hold for as long as makes sense. Minimal CapEx requirements up front, and a little Loss to Lease in the first few years with some units’ rents being below market.

I’d love to get some feedback on what you’d do and why!

Option A - Local Bank

LTV: 75%

Am: 25yr

Term: 5-yr ARM at 4.2% or 7yr ARM at 4.54%

Origination Fee: 0.5%

Prepay Penalty: $0 (1% of remaining loan if refi’d with another lender)

Option B - Private Lender

LTV: 80%

Am: 30yr

Term: 10yr ARM at 5.25%-5.5%

Origination Fee: 1%

Prepayment Penalty: $0 (1% of remaining loan if refi’d with another lender)

James Dietter · Answer

In my experience with single family flips, building relationships with private lenders does not bring their rate down. However, building relationships with banks does bring rates down. Go with option A. Also, A has lower rates. :)

Evan Polaski · Answer

@Mitchell Fuselier, with what you provided, I am also with Will and Pasi.

As you are noting, bank debt is almost always cheaper than private debt, and having relationships with local lenders is invaluable.  It is amazing how their underwriting criteria changes after a few good deals (lower DSCR, faster closings, lower rates, short seasoning for a refi, etc).

Pasi Musaindapo · Answer

@Mitchell Fuselier

Option A... 7 year arm is good!

Will Fraser · Answer

Option A - The only detriments to this compared to B are 5% LTV difference, 0.5% origination fee, and a shorter fixed rate portion.

I'd probably roll with the 7-year ARM with the local bank and build a killer business with them.  I've had such good fruit from my local bank partnerships that I'm a sucker for them.